Techstep ASA (TECH) Earnings Call Transcript & Summary

Good morning, and welcome to this Q&A session following the publication of TechStep's financial results for the first quarter of 2022. My name is Erik Haugen, and I will moderate this session. Answering your questions today will be CEO, Borge Astrup; and CFO, Anita Huun. This session will be recorded and published on our website at techstep.io later today. We will open up for questions after a short summary of Q1 2022 by CEO Borge Astrup. Borge?

Good morning, all. So the TechStep's transformation journey is progressing and while the quarterly results are not where we want them to be, I'm happy to see that the underlaying factors are pointing in the right direction. And our focus on recurring revenue continues. A recurring commitment is important, both for our customers and us, meaning that we strive to deliver high customer value every day through services and products. This will also result in the strong profit going forward for TechStep. Focusing on the underlaying factors are a key success criteria when building a recurring business. The underlaying factors gives us clear indications on how our performance and our financial results will be going forward. We see a continued increased commercial momentum with closing contracts for a total value of NOK11 million in annualized recurring revenue and 17 new managed mobility service contracts with 9,500 managed devices in Q1 2022 versus 8 contracts and 3,200 managed devices in Q1 2021. When customers buy our software, we see a positive tagline effect on the hardware resulting an increased volume of mobile devices sold our customers both in the traditional transactional way and as a service. The volume the saw grew with 20% compared to last year. The pace of implementation were not where we wanted to be in Q1. We have picked up the speed in Q2, but the slow pace in Q1 is affecting the results. The gross profit last 12 month is steady on NOK459 million, as well as the adjusted EBITFDA of NOK70 million. We are on ongoing restructuring and transformation where we are building a wave of recurring revenue in the coming years. Our analyzed recurring revenue in the first quarter increased to NOK270 million, this includes our own software advisory services and hardware, cluster service and growth in recurring revenue will continue to be our key focus moving forward. We have also announced acquisition of Crypho adding additional software capabilities to our platform. Crypho is an award-winning end-to-end encrypted mobile messaging and information sharing software for businesses just like WhatsApp is for consumers. Accusation of Crypho is part of our buy and build strategy to increase our recurring revenue and software offering to deliver increased value to our customers and other stakeholders. In Q1. We also launched the new TechStep brand. The rebranding will reinforce our position as the leading European enabler of smart mobile technology. Thank you, Erik.

Thank you, Borge. We will commence with the questions. I encourage you to use our investment relations email, [email protected]. We have some questions that have come in previous to this session. The first one is addressed to you Borge. You say that you are transforming to a recurring revenue model and you report new MMS sales every quarter, but your recurring revenues are not up. Why is that?

So what you need to understand is how our, how we work with customers. First, we do a sales booking when the sales booking then is completed, we implement the services for the customer and then we invoice and get the revenue coming in. We see good traction in sales bookings, it's all-time high for TechStep. We see that we had a longer lead/implementation times than expected. One of the reasons for this is due to integrations with the customer's internal systems. This is a demand for enterprise customers. And also when we sell the smart work solutions, there are custom elements that needs development and/or configuration that also takes time. This is reflected in our financial result for the -- for Q1 and one of our definite key focus moving forward.

Thank you. We'll continue in the financial track. Anita, this one is for you. Why is the gross margin down in the quarter?

The facts -- in Q1, we reported 4 percentage point decline in our gross margins. It's important to understand that the gross margin can vary quite a bit from quarter to quarter, depending on the product mix within the quarter. And in Q1, we had a very strong growth from our hardware portfolio, both from transactional and from hardware as a service and the total -- it increased the share of revenue coming from hardware. And that is what basically lowered the margin in Q1. And we also have a customer mix skewed towards more large customers in Q1. And that also takes the margin slightly down on the hardware side.

I will continue with financial question again for you Anita. Cash flow in the quarter looks low. Can you elaborate, please?

Yes. So Q1, we had quite a cash intensive quarter and it's mainly driven by 3 things. We had our working capital increased with NOK 18 million in Q1, it's a slight inventory build, but more importantly, we do quite a bit of prepayments in the first quarter, or at least we did this quarter. It's typically for IT related costs and licenses, which we then again invoice our customers going forward. So it's part of our product offering. And then we also had quite a CapEx intensive quarter. So we've guided CapEx for the year of NOK 40 million to NOK 45 million, but we had almost NOK 19 million in Q1. So it's skewed quite a lot towards this quarter, our CapEx. And that's because we have finished some of our larger IT projects among them, our ERP rollout and that has intensified this quarter's CapEx. So this is not the rate we're going to see going forward. On top of that, we also acquired the remaining 20% of TechStep Finance, which has an outflow of NOK 9 million in the quarter.

Thank you. Very good. You highlight your delivery to Pagen in the Q1 presentation. Is this an example of a typical TechStep customer going forward?

So SmartWorks is a very important part of our product portfolio. When customers buy our SmartWorks solutions, we also see a very positive tag along effect, both for SmartDevice and for SmartWorks, oh sorry, SmartControl. Because the -- when they've bought the SmartWorks solution, they need very often a device and be able to handle the life cycle. That is what we then can deliver to them with the SmartDevice offering to it. They also need to manage the devices, secure them and also distribute the apps more effectively and that then is delivered through SmartControl. So Pagen is a good example of how we can reuse rebuild parts of our offering to a larger and demanding customer and deliver high quality and high value back to them. Acquisitions within SmartWorks area is also very interesting for us going forward, because then we also can deliver more and better value towards our customers. So this is a key step towards our transformation journey. So yes, I would say that Pagen and SmartWorks customers are a typical focus area for us moving forward.

Thank you. Moving over to acquisitions, question here, what made Crypho an interesting acquisition for TechStep. Where in your offering does Crypho fit in and are you targeting future acquisitions?

So smart -- in the smart portfolio, Crypho fits perfectly in, in SmartControl and we will also reuse parts of the capabilities in SmartWorks. The reason why we found this very interesting is that customers has requested similar capabilities that Crypho offers. A lot of the similar services are built mainly for the consumers, exactly like WhatsApp, but these are not built for businesses. Crypho is built for businesses. The solution is GDPR compliant with easy administration of users and user groups. The data is securely stored in Norway on Norwegian data centers where the more consumer solutions are storing their data outside of Europe. ESG is also a very important area. Sustainability is a key for us and for our customers and with the Crypho solution, customers can reduce their carbon footprint on data storage through the file sharing capabilities of the platform. Often customers are then sharing email or files via email, and then if you share a large file with multiple of people, then that's stored on all those devices rather than having it stored one place in Crypho. And of course, then the file is secured and encrypted as well. So yes, we will continue with our buy and build strategy moving forward as well.

Thank you. I'm checking to see whether there are any last questions coming on IR and it is not. So with that, we'll conclude today's Q&A session. This will be recorded, as I said earlier, and posted on techstep.io to be heard at the later stage. We thank you for your attention and wish you all a very good day.